New states have earned right to use euros

When it comes to meeting the conditions for joining the single currency “rules is rules”. This was the uncompromising message dished out last week (1 June) at the Economic Forum organised by the European Commission’s department for economic and financial affairs by, among others, Regional Affairs Commissioner Danuta Hübner and Klaus Regling, director-general for economic and financial affairs.

Regling found himself enjoying heavyweight support from the German Finance Minister Peer Steinbrück. Plus ça change, you might say.

At least in economic terms, things have been going swimmingly for most of the ‘convergence club’. In 2006 growth in the new member states was 6%, comfortably above the 2.75% of the euro area. This was no flash in the pan. Over the ten years, 1997-2006, the EU10 plus Bulgaria and Romania have been growing twice as fast as ‘old’ Europe. Incomes per person in the EU10 have now risen to 55% of EU15 levels (in 1997 the figure was 44.7%). The trend looks set to continue.

But there are problems. As Hübner pointed out, even at this pace it will take 35 years for the gap in per person incomes between the EU10 and the richer EU15 to close. Achieving this will require far greater structural economic upheavals in the EU10 economies than the (albeit enormous) adjustments that the EU15 are struggling to make to cope with the combination of rapid technological change and the rise of emerging market economies like China and India.

But are the strict requirements for joining the eurozone actually doing more harm than good? Marek Belka, the former Polish deputy prime minister and finance minister, certainly thinks so. Those who are insisting on a strict interpretation of the criteria for membership of the eurozone and whose inflexible stance led to the “deplorable” exclusion of Lithuania from the euro club last year because of a tiny inflation overshoot, are contributing not just to an economic divide in the Union, but adding to its “political disintegration”, he said.

Erik Berglöf, the recently appointed chief economist at the European Bank for Reconstruction and Development, backed him up. The concept of “transition economies” needed to be revisited, he said. These economies have already, in this view, undertaken the most drastic institutional transformation in history. They are completing reforms which China, for example, has not even started. They have made enormous sacrifices as a result of which they are facing reform fatigue, especially when it comes to fiscal restraint. And now the prospect of membership of the single currency is being pushed further into the future by entry requirements which are politically and economically questionable. This is weakening reformist motivation among the leaders and contributing to a sour political mood among those who are being left behind by the pace of change.

According to this view, it is time to cut the ‘outs’ some slack. The euro-club gatekeepers should accept that the economic arguments in favour of strict entry requirements are less clear cut than they sometimes suggest. Fast growing economies may, for example, have higher wage inflation rates than the best performing EU members, but they will also have high productivity growth to offset it. Recognise, too, that the benefits of membership will be especially valuable to these smaller countries, since they are more vulnerable to economic shocks simply because of their size. Even if they were inside the eurozone, they would be under global economic pressure to keep up the pace of reform.

These arguments are weighty. But they are not going to be heavy enough to change the mindset of members of the euro-club, especially Germany, which has been paying a high price for adjusting to the challenges of globalisation. It is not going to allow any free-riding by a group of neighbours, some of whose political, not just economic, stability could yet be tested.

Against the odds, in a mere seven years, the single currency has established itself as a credible global currency and the zone of stability its founding fathers dreamed of. The membership rules are there to protect this success.

As Economic and Monetary Affairs Commissioner Joaquín Almunia pointed out, non-members, including the United Kingdom, will appreciate this triumph, especially if the current ‘golden age’ of synchronised global economic growth comes to an end with a bang rather than a whimper.

The ‘outs’, all of them, would be best advised to prepare for this eventuality. And the Union should, in the meantime, do its utmost, short of issuing free passes to the euro-club of the sort it issued to Italy, strive to minimise the potential for economic friction with its member states.